The present invention relates to administering and facilitating financial transactions. More specifically, the present invention relates to automated handling of financial transactions known as Tri-Party Repurchase Agreements, which are also commonly known as tri-party “repo” agreements.
A repurchase agreement or “repo” agreement (or, simply, “repo”) is a contract in which one party, the Seller, sells securities to another party, the Buyer, and agrees to repurchase the securities at a later date at a specified price. Generally speaking, a repo agreement is a form of collateralized short term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day. For the party (e.g., dealer) selling the security (and agreeing to repurchase it in the future) it is a “repo”; for the party (e.g., investor) on the other end of the transaction (buying the security and agreeing to sell in the future), it is a “reverse repurchase agreement.” However, the transaction is often just simply termed a “repo” by both parties.
A repo is similar to a secured loan, with the lender of money receiving securities as collateral to protect against default. Under a UK repo agreement, legal title to the securities passes from the dealer or seller, i.e., the provider of the collateral, to the investor, i.e., the party providing the money. (No title transfer occurs under U.S. law.) Either a U.S. agreement or a U.K agreement may be utilized, based on what the dealer and investor require. Coupons that are paid out on the securities during the life of the loan are transferred to the original owner of the security, regardless of which agreement is used.
For the buyer or investor, a repo is an opportunity to invest cash for a custom period of time, typically overnight, as mentioned. Moreover, a repo is a short-term and secure investment; in return for investing, the investor receives a rate of interest as well as collateral to secure the investment. Market liquidity for repos is good and yields are competitive to comparable length investments.
For the dealer or seller, repos are used to cost effectively finance long positions.
The size of the global repo market is substantial. The US Federal Reserve and the European Repo Council (a body of the International Securities Market Association) both try to estimate the size of their respective repo markets. At the end of 2004, the US repo market reached USD 5 trillion and the European repo market passed EUR 5 trillion in outstandings.
In practice, a repo agreement can be transacted in several ways. In a first way, the investor and the dealer negotiate with one another and close an agreed-to deal without any outside assistance. The dealer then would deliver securities to the investor and the investor would deliver cash to the dealer. This is typically referred to as a ‘delivery repo’.
A second, more common way to effect a repo transaction is to involve a trusted third party, or intermediary, to match the details of the trade agreed between the Seller and the Buyer, and to assume all of the post trade processing and settlement work related to the trade. The third party is typically a bank. Indeed, one of the primary lines of business of the Broker Dealer Services Division of the Bank of New York (“BNY”) (the assignee of the subject matter described herein) is the provision of “tri-party services.” In a tri-party transaction, The Bank of New York acts as a service provider to two principals in an underlying trade. Typical types of underlying trades include not only repurchase agreements, but also securities lending agreements, derivatives agreements and others.
For example, one type of securities lending agreement comprises a borrow/pledge type transaction. A triparty borrow/pledge transaction is a transaction where a borrower of securities, typically a broker dealer, agrees to borrow securities from a securities lender, although unlike a typical securities lending agreement, where the borrower collateralizes the value of the loan with cash, in a triparty borrow/pledge transaction, the borrower collateralizes the lender with other securities, typically through a third party custodian bank. The transaction flow is similar to the triparty repo flow, except that no cash moves through the third party custodian.
In a tri-party borrow/pledge transaction, the two principals to the trade inform BNY of the value of the underlying loan on a daily basis. BNY matches the instructions received from borrower and lender, and the borrower provides securities to BNY to be pledged as collateral. BNY utilizes a collateral allocation engine to screen collateral for eligibility, apply margin and properly allocate collateral to a segregated account in the name of the lender.
BNY also delivers reporting that provides the amount of collateral required, and detailed valuation of each line pledged.
Generally speaking, a securities lending transaction is a means for broker dealers to borrow securities so that it is able to cover a short position or satisfy its need for the security. The transaction may last a single day, or it may be open-ended. For the lender, the transaction is an opportunity to earn a return on assets it holds in its inventory.
Notwithstanding the several different types of triparty agreements that may be handled, repurchase agreements typically make up approximately 80% of the tri-party trades in the Broker Dealer Services Division of BNY, and is thus a significant portion of the tri-party business.
FIG. 1, shows a generic transaction flow for a tri-party repurchase agreement where a service provider (typically a custodian bank) is disposed (logically speaking) in the middle of the transaction to ensure that each party is never without either cash or securities throughout the term of the transaction, thereby ensuring that both parties are “whole” at all times. The presence of the third party bank not only brings an additional layer of security to the transaction, but it also brings efficiencies and reduced costs for both principals to the trade.
In the tri-party repurchase agreement transaction flow shown in FIG. 1, a dealer/seller/borrower/trader and an investor/buyer/lender first agree, between themselves, on a particular trade (Step 1). Thereafter, The Bank of New York receives a trade instruction from both the dealer and the investor (Step 2). Most of the large dealers have dedicated telephone-line-based connections into The Bank of New York, over which they provide their tri-party repo deal instruction. This instruction is typically delivered in the form of an electronic message that includes several distinct fields of information, which load into a collateral management system (which are well-known in the art). However, a typical investor does not have such an electronic connection, and thus usually sends repo transaction instructions to the bank via fax, or sometimes by email, or even by regular telephone call. In accordance with longstanding practice, a BNY account administrator must then match (Step 3) the faxed (or emailed or telephone call) instructions from the investor to the electronically-provided instruction received from the dealer. This matching step is performed manually by looking at each relevant field to ensure that it matches the fields in the instruction received from the dealer. Preferably, the minimum or mandatory fields that must match include:                Account ID        Deal amount        Start Date        End Date        Rate        Seller        Buyer        
Optional fields that are reviewed for matching include:                Indicator of type of collateral to allocate        Reference number        
Once a match has been confirmed by the account administrator, the dealer delivers the collateral (e.g., Treasury Bills) to The Bank of New York and, at essentially the same time, the investor delivers the agreed-upon cash or loan amount to The Bank of New York (Step 4). The Bank of New York thereafter confirms to the investor that the collateral is eligible per the tri-party agreement, and applies applicable margin to each line of collateral, also per the tri-party agreement. This collateral is segregated in an account established in the name of the investor (Step 5). The Bank of New York also transfers the cash/loan amount to the dealer (Step 6).